BRAZIL-OUTLOOK: A Turbulent Year for Finances

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Dec 23 1998 (IPS) - This year saw a sharp reassertion of economic globalisation and the tyranny of finances. As well as lessons, 1998 provided consequences that will hit a number of Latin American countries even harder next year.

Brazil was one of the clearest expressions of the danger that any medium-sized country can abruptly fall into misfortune and drag the world down with it, due to a power of contagion totally out of proportion with its influence during periods of prosperity.

In the fourth year of a stabilisation programme praised by all, Brazil – the world’s eighth largest economy – offered the world a fast-growing market in which car sales had doubled and sales of television sets tripled.

Latin America’s giant drew around 24 billion dollars in direct foreign investment this year, surpassed only by colossal China. Privatisations brought state coffers a similar amount, which included the 18.9-billion dollar sale of the telecommunications system in July.

Threatened by the Asian crisis which broke out full-scale in October 1997, the government reacted swiftly by raising interest rates and implementing 51 fiscal austerity measures. Foreign reserves were increased to 74.65 billion dollars in April.

Unlike the Asian countries in the grip of the crisis, Brazil’s banking system had been put on a sound footing in the years prior to the meltdown, and blemishes like the political use of state banks began to be corrected, with most state banks either in the process of privatisation or shut down.

The largest member by far of one of the world’s most powerful economic players, the Southern Cone Common Market (Mercosur – Brazil, Argentina, Uruguay and Paraguay) and with a president who enjoys international prestige – sociologist Fernando Henrique Cardoso, who was easily reelected in October – Brazil seemed to be moving toward a brilliant future.

But there were critics and ill-omened projections. Several prominent economists pointed to vulnerabilities such as a 32- billion dollar a year trade deficit and a fiscal deficit of around 60 billion dollars – too bulky for an economy of 800 billion dollars.

The Russian debt moratorium declared in August brought the house of cards crashing down. Brazil’s reserves plunged by 21.5 billion dollars in September, and capital flight did not let up in the following months.

Economists like Edmar Bacha, a key member of the Brazilian government in recent years and today the director of a bank in New York, stressed the urgent need for support, as well as Brazil’s good chances of securing an international rescue package.

Due to the weight of its economy, Brazil put global stability in jeopardy, and represented an opportunity to check the domino effect of the international financial meltdown.

The bail-out was designed in October, and ended up drawing 41.5 billion dollars from the International Monetary Fund (IMF), development banks and the governments of 20 wealthy nations. The funds began to be disbursed to Brazil this month.

The world is ending the year free of the panic seen in previous months. Stock markets remained virtually impassive last week in the face of the U.S.-British air strikes against Iraq and the vote for impeachment hearings to be held against President Bill Clinton. Two months ago the same events would likely have triggered major losses.

But the damages to the real economy have already been caused, and serious social woes are predicted for next year. The first half of 1999 will bring recession in Brazil, with record high unemployment rates – according to everyone but the government.

That panorama will have repercussions on the rest of South America, especially countries directly dependent on the Brazilian market, such as the other Mercosur partners.

In consequence, the Latin American economy as a whole is expected to grow only one percent in 1999, compared to 2.3 percent this year, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).

The government forecasts included in the agreement with the IMF predict a one percent contraction for Brazil’s gross domestic product, which would suppose a slight recovery in the second half of the year.

One direct effect will be seen in Argentina, whose economy is growing 5.2 percent this year – a rate that should drop to three percent next year according to the latest IMF projections.

But there are still risks to the global economy, whose performance could slump further, the international lending institution warned.

The shadow is still looming over Brazil. Investors are carefully monitoring the implementation of the new fiscal adjustment measures, which have been promised several times in the past but never fully carried out.

Nations, especially highly indebted ones, are being reduced today to banking entities, subject to capital flight and bankruptcy if their credibility wanes.

Many economists believe that a devaluation of Brazil’s currency, the real, is inevitable – a possibility that strikes fear into the heart of Argentina, which sells one-third of its exports to its giant neighbour, and trembles at the thought of destabilisation, an even harder-hitting recession and higher inflation in Brazil, just as occurred in Southeast Asia.